Damn The Torpedoes!

The consequences for trying to repeal the natural economic cycle are almost comically obvious now. On Friday the dollar closed at a new low, gold a new high, and oil a new high as well. Take a look at this one-year chart of the latter. Remember: as the price of oil continues to rise, it puts enormous pressure on policymakers. Statists hate pressure, especially when they also hate the minutiae and hard work that actual governing entails. From various sources, including Ron Suskind's The Price of Loyalty, we know that privately the Bush administration was in a panic about the economy in early 2001. 9/11 and two wars followed, and thus an all-purpose excuse for economic problems and justification for the reinflation and overt/covert stock-boosting liquidity that continues to this day. This is why it's important to avoid or short-circuit financial bubbles like technology in the late 1990's and, more recently, housing; when they pop, bad things happen. Real enemies try to take advantage of perceived post-bubble weakness, extraordinary measures create subsequent echo bubbles and further imbalances, and foreign and domestic scapegoats distract people from policy failures. It's a pattern that repeats over and over.

Make no mistake: the administration is now in damn-the-torpedoes mode on the economy and financial markets. The housing market must not be in the headlines a year from now. The stock market must be at or near its highs when the administration leaves office so capital gains can be realized at good prices before a Democratic president raises taxes, and so apologists can point to the Dow and claim for the next few generations that Bush's fiscal policy "worked." Damning the torpedoes has consequences, of course. They show up in the commodity and foreign exchange markets, at the gas pump, and in the grocery store. The White House and Federal Reserve probably don't know how bad those consequences could get. They might even fear that things are beyond their control at this point. Do you think this particular administration will sit by idly if oil goes to $100, then $110, then $120 -- and a gallon of gas hits $4 in some areas during next summer's driving season, just a few months before the election? "Unrest in Nigeria" and "refinery problems in Texas" (and lately "Turkey-Kurd tensions") have limited shelf life as excuses. Statists hate pressure, but they fear consequences -- particularly when the culpability is both obvious and unavoidable.

This is why keeping Iran as an ever-ready trump card is so important. If those consequences get bad enough and no excuse will do, the use of force must be at least minimally plausible to the public and the rest of the world. In the meantime, the tension -- preferably continuous and drawn-out -- created by the mere possibility of a military strike is useful as an ongoing excuse for the spiraling price of oil (note here how "the door stays open" to a blockade -- perfect!).

The Federal Reserve meets this coming week, apparently to pay homage to Admiral Farragut once again, and bring the end game into even clearer focus.